October 1, 2022

BTC price took a sharp tumble below a key support level, but data shows April 6’s dip could be another buying opportunity for bulls.

Source: CoinTelegraph

Bitcoin (BTC) has been struggling to break the $47,000 resistance and even with April 6’s drop below $44,000, there is still mounting evidence that the market structure is healthy. 

On Dec. 3, 2021, Bitcoin initiated a 25.6% correction that lasted 18 hours and culminated with a $42,360 low. Four months later, the price remained 18% below the $56,650, closing on Dec. 2, 2021.

Much has changed over that period, and hard evidence comes from other sections of the sector. Between February 15 and April 2, 2022, enterprise software development firm MicroStrategy announced the acquisition of 4,197 Bitcoin.

Inflows to Canadian Bitcoin exchange-traded funds (ETFs) also hit an all-time high, according to data from Glassnode. These investment vehicles in Canada have increased their holdings by 6,594 BTC since January to a historical high of 69,052 BTC under management. The Purpose Bitcoin ETF, a spot instrument, currently has $1.68 billion worth of assets.

Among the wave of recent buyers is Terra’s Luna Foundation Guard (LFG), which is on a mission to acquire $3 billion worth of BTC as a reserve for TerraUSD (UST) stablecoin.

CoinMetrics data shows that the active on-year Bitcoin supply reached 36.8% on April 5, its lowest level since September 2010.

Source: CoinMetrics

The chart shows how “diamond hand” holders have not moved their coins over the past 12 months.

Futures markets show traders are uncomfortable near $47,000

To understand how professional traders are positioned, including whales and market makers, let’s look at Bitcoin’s futures and options market data. The basis indicator measures the difference between longer-term futures contracts and the current spot market levels.

The Bitcoin futures annualized premium should run between 5% to 12% to compensate traders for “locking in” the money for two to three months until the contract expiry. Levels below 5% are extremely bearish, while the numbers above 12% indicate bullishness.

Bitcoin 3-month futures annualized premium. Source: Laevitas.ch

The above chart shows that this metric dipped below 5% on Feb. 11, reflecting traders’ lack of demand for leverage long (bull) positions. The sentiment changed on March 26 after the basis rate regained the “neutral” 5% threshold. Even though this occurred, there are no signs of confidence from pro traders, according to the futures premium.

Options traders worry about downside risk

Currently, Bitcoin seems to lack the strength needed to break the $47,000 resistance, but traders should use derivatives to gauge professional investor sentiment. The 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge for upside or downside protection.

If those traders fear a Bitcoin price crash, the skew indicator will move above 10%. On the other hand, generalized excitement reflects a negative 10% skew.

Bitcoin 30-day options 25% delta skew. Source: Laevitas.ch

Data shows that the skew indicator has been ranging between 0% and 8% since March 9. Albeit not signaling fear, these options traders are overcharging for downside protection. From the BTC options markets perspective, there’s a slightly higher risk for unexpected downward price swings.

The neutral-to-bearish Bitcoin derivatives data offers an interesting opportunity for bulls. If somehow the $47,000 resistance is broken, this will be a surprise for most investors. Two positive effects will arise from that event: a short squeeze from derivatives markets and room for buyers to use futures for leverage.

If Bitcoin’s futures premium had been running above 10%, traders would face a much higher cost to add long (bull) positions. Bulls seem better prepared to deal with the $47,000 price resistance considering the sound market structure that is marked by the absence of exaggerated buyers’ leverage and this provides better odds of success.